Interest only mortgages
We connect you with friendly mortgage experts who can guide you to the right interest-only deal.
Only pay interest each month
Free up cash for renovations or other projects
Afford a higher-priced property with reduced monthly costs
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What is an interest only mortgage?
An interest only mortgage means you pay only the monthly interest on your mortgage. You don't pay any of the loan itself until the end of the agreement.
You'll need to show lenders a solid repayment plan that proves you're eligible for an interest only mortgage. The plan kicks in once the mortgage terms ends, at which point you'll need to pay off the entire loan amount.
Interest only mortgages are usually only available to high earners with a deposit of at least 25%. They can be particularly useful for buy-to-let landlords or homebuyers who want to keep their monthly payments low while they build equity in the property.
How to pay off an interest only mortgage
Before you take out an interest only mortgage, you'll need to show lenders how you plan to repay it. Here are some typical repayment strategies that lenders accept:
Savings account or ISA
You can use your savings to pay for your mortgage at the end of the term. Some lenders may have restrictions on which types of savings can be used, and you'll need to show recent savings statements to confirm this strategy when taking out the mortgage.
Get your quoteYour pension
Depending on your pension plan, you can use a lump some towards the value of your interest only mortgage. Your lender may have restrictions on how much can be used, and your age and retirement age may affect your repayment options. You'll need to show your pension statement when you apply.
Get your quoteYour investments
You can use investments -- including a stocks and shares ISA or investment bonds -- as payment for your mortgage. You'll need to show their current value at the time of arranging the mortgage, and evidence of shareholding and valuation. Each lender will have its own terms and conditions for using investments as payment.
Get your quoteOther properties
If you own other UK property, you can sell it to pay for your interest only mortgage. You'll typically need to be the sole owner for mortgage lenders to accept this strategy, and they might impose a limit on how much of the equity can be used as part of your repayment plan.
Get your quoteEndowment policies
The projected maturity of your endowments must be enough to cover your mortgage for the lender to consider this repayment plan. There may be other restrictions such as when your repayment term begins and ends, and you'll need to show the lender your policy statement at the time of arranging the mortgage.
Get your quoteSell your property
If you doubt you'll have a lump sum available at the end of the mortgage term, you can usually offer to sell the mortgaged property to pay off the loan. You can sometimes only propose this strategy for a certain percentage of the loan amount, but you can use it in combination with other repayment options such as savings.
Get your quote
Interest only mortgage vs. capital repayment mortgage
Interest only mortgage
Interest only mortgages are designed to keep your monthly payments low. This means you can use the spare funds to improve the property and increase its value, so that you're in a better financial position once the full mortgage is due.
Lenders may offer buy-to-let mortgages on an interest-only basis and a residential version with different eligibility criterial. Both require a strong repayment plan and usually a large deposit.
Capital repayment mortgages
Capital repayment mortgages -- also known as repayment mortgages -- are by far the more common type of mortgage for homeowners. The key difference is that your monthly payment is made up of both interest and the loan itself, regardless of whether you choose a fixed or variable interest rate.
Repayment mortgages are designed to slowly reduce the loan and pay off the total amount by the end of the mortgage.
Pros and Cons of an Interest Only Mortgage
Advantages of an interest only mortgage
- Lower payments: Because you're only paying the interest and not the loan, interest only mortgages offer lower monthly payments than other types of mortgage on the market.
- Access to property: Thanks to the lower monthly payments, an interest only mortgage could give you access to higher-value properties than you could otherwise afford.
- Investment options: For an investor or landlord, interest-only lending is an efficient way to increase your property portfolio with affordable payments, while you work on boosting the property value.
- Flexible options: Designed for dynamic circumstances, interest only mortgages usually have the option to overpay or switch to a repayment mortgage once you can afford it. Both options usually come with charges.
Disadvantages of an interest only mortgage
- Negative equity: If property prices go down during your mortgage, there's a higher chance of falling into negative equity with an interest only mortgage. That's when your outstanding mortgage is higher than the property is worth.
- Higher cost: Interest only mortgages can be more expensive in the long run. As the loan amount stays the same, so does the interest, which means you'll pay more in total interest than you would with a repayment mortgage.
- Low certainty: Even with a fool-proof repayment plan, it's difficult to predict changes to your finances or fluctuations in the property market. This means the lump sum due at the end of the mortgage could put you into financial difficulty.
- Property risk: As with any mortgage or secured loan, you risk losing your home if you fail to keep up your monthly repayments. If you can't raise the lump sum to repay your mortgage once it ends, your property could be repossessed.
How can I get an interest only mortgage?
An interest only mortgage is typically harder to get than other types of mortgage. As well as having a solid, documented repayment strategy, you'll also need to be a relatively high earner. Many lenders will require an annual salary of at least £50,000 to £75,000, or a joint salary of £100,000.
This kind of mortgage is usually limited to 75% of the property value, meaning you'll need to have a 25% deposit in place. There may also be restrictions on the value of the property you're able to buy, although the threshold will probably be higher in London.
Mortgage lenders may want to meet you in person to check your affordability. They'll also be in touch throughout your mortgage term, to make sure your repayment plan is still viable. If you intend to use your pension or savings as payment, you should consider them spoken for and not available for other purposes until your mortgage is paid.
If you can't pay off your interest only mortgage
If you think you'll struggle to keep to your payment plan, you should contact your lender as soon as possible to discuss your options. These might include the following:
1. Overpay on your mortgage
If you find you have spare funds ahead of your mortgage end date, you may be able to make extra payments.
This will usually incur an early repayment charge (ERC) but it will reduce the overall size of your loan when the time comes to pay it off.
2. Switch to a repayment mortgage
You may be able to change your mortgage plan to a repayment mortgage, either during or at the end of your mortgage term. This will increase your monthly payments and bring down the outstanding amount. The sooner you contact your lender about switching, the better.
3. Extend your mortgage term
Depending on your age and other circumstances, you may be able to extend the length of your mortgage. While this doesn't always solve the problem, it may reduce the size of your payments and give you time to work on your repayment options.
4. Remortgage
You may be able to take out a new mortgage with a different lender. This way, you could pay your existing mortgage and enter into a new new interest only or repayment mortgage, or perhaps a combination of both.
5. Consider a retirement interest only (RIO) mortgage
If you meet your lender's age requirements, you could look into retirement interest only mortgages. This option has no end date, but the loan must be paid back if you die or go into care, or if you sell the property.
If you're looking to leave some equity behind, some lenders will be flexible about how much of the loan you can pay.
6. Sell your property
If all else fails, you can sell the property to pay off the mortgage (assuming it hasn't decreased in value). This may have been part of your plan all along, and you may have significantly increased the value of the property and wish to cash in on the equity you've accrued.
Preparing to apply for an interest only mortgage
All mortgages are provided at the lender's discretion. If you're applying for interest-only deals, you'll need to show specific information to the lender.
Our expert says:
‘’If you're on a high income or looking to buy-to-let, interest-only borrowing can be an efficient way to move up the property ladder while keeping your monthly payments low. If you think you might struggle to pay back the lump, talk to your lender to work out a new repayment plan. The sooner you contact them, the more likely you'll find a solution that suits you both.”
Frequently Asked Questions
Are interest only mortgages available for buy-to-let properties?
Yes, interest only mortgages are a popular choice for buy-to-let landlords and property developers. As an investor, you can increase the value of your property during the mortgage term, offering equity as part of your repayment plan. Also, you're not relying on the property as your only home should you need to sell it at the end of the term.
Can I use a windfall to pay for an interest only mortgage?
Windfalls, such as inheritance payments or bonuses, aren't typically used as repayment strategies for this type of mortgage. This is because they're based on future outcomes and so they're not guaranteed. Pensions and savings, on the other hand, can be proven in the form of statements and certificates.
Are interest rates high for interest only mortgages?
In general, the interest on this type of mortgage is comparable to any other mortgage loan. The interest can be fixed rate or variable, and may come with a cheaper introductory rate. When this period ends, interest will default to the lender's standard variable rate (SVR).
What if I can't or don't want to sell my home?
If selling your property was part of your repayment plan, but you now find you can't find a buyer or you want to keep the property, always talk to your mortgage provider to discuss your options. You should also contact your lender if you're struggling to meet your monthly mortgage payments at any stage of the loan.
Can you have a mix of interest-only and repayment mortgage?
In some cases, yes. This is known as a "part and part" or "hybrid" mortgage. This can keep your monthly mortgage repayments low while still paying off some of the loan, giving you both flexibility and reassurance that the debt is being paid.
Who are interest only mortgages suitable for?
As well as attracting high earners, this kind of mortgage may be suitable if your earnings are irregular or dependent on bonuses or commissions, or if you have access to large sums through selling other property or assets.
Interest-only lending may be especially useful for landlords with paying tenants. They can use the rental income to cover their monthly repayments or put aside the profits to pay back the loan in full.
Which banks offer interest-only lending?
At the time of writing (September 2024), Barclays, Lloyds, HSBC and NatWest are among the major lenders offering an interest only mortgage, but the eligibility criteria is very strict. Talk to a mortgage broker or use our mortgage comparison tool to explore the full range of options available.
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